To establish the basis for genuine Islamic alternates of current monetary system, it is essential to understand the nature of modern money. In this sequence of posts, various such elements on the nature of modern money are explored that are so far overlooked by Islamic scholars. For this, we must understand the way secular economic experts have defined money and on what grounds Ulema has accepted it as a permissible system.
Modern economists define money in a number of varying views that are astoundingly conflicting. Therefore, no significant consensus is found about either role of money. Classical and real business cycle economists rule out any significant role of money in the real economy. On the other hand, Keynesians believe that money is a potential tool to successfully combat recessions. But monetarists argue that monetary policy has large and inconsistent time lags so, discretion is not viable to deal the economic adversity. Heterodox economists define role of money like a debt-obligation of state, as it is not backed by a valuable commodity like gold/silver. Chartlists and proponents of modern monetary theory define a radically different role of money, as a public monopoly. Contrary to convention, Stephan Zarlenga (2002) opposes private credit creation in favor of nationalization. In addition to these, several other models present a variety of insights about money in current economic system. Evidence of multiple equilibria from these models, particularly in presence of expectations is one interesting aspect, where conventional theories can explain nothing. Given this, Zaman (2014) argues that even in the simplest framework, coordinated understanding that must be agreed upon is necessarily required to determine the role of money in any economy.
Likewise, Islamic scholars also define money in several different ways. It can be a certificate of debt, or a new form of commodity or asset, or a substitute of gold/silver, or an alternate (but not equivalent) to gold and silver that measures the values of goods. There are supporting and opposing arguments for each definition, but Ulema have most consensus for the last one. Ironically, not because of conformity with Nasoos (Quran & Sunnah) but on rational to fit with needs of modern economic setup. Money from first three definitions is not compatible with the modern monetary structure. As it may not be useful for trade and not subject to interest and Zakat etc. This situation requires rethinking and understanding the aspects of money that are not yet revealed to the Islamic scholars.
Given the central importance of Zakat and Interest in Islamic economic system, compliance of money with Islamic Law can be ensured only after having a clear understanding about existing fiat money. There are several important features of money that are not accounted in before arriving at Fatwa on money. In this regard, some aspects of particular importance are discussed in detail.
First, development of a ruling on the basis of analogic method (Qiyas) may not work for current monetary structure. As it is unique in nature; nothing similar to this has ever existed in past. Second, this monetary system is consciously designed and evolved in wake of some historical incidents to meet certain objectives. This system is asymmetric and favors some segments of economy against the others Williamson (1977).
Third, the system is asymmetric even among the economies. US dollar is used as reserve currency in all world as it is given equivalence value and replacement to gold. Therefore, US can print any amount of dollars without restrictions or reserve requirements. This favor to USA have several negative implications for Muslims. Being creator of money, US can exchange paper for real resources including oil, human resources and even political and social dominance anywhere across the world. One prominent example is Iraq war that was entirely financed by printing huge amounts of dollars (seigniorage). The war would have been impossible, had rest of the world refused to accept dollars.
Fourth aspect is that printing dollars levies inflation tax on all countries that keep dollar as reserves. Therefore, USA has a privilege to earn revenue from whole world out of no effort. This huge privilege enables USA to influence and dominate entire world. As per Mahathir Mohammad, USA economy can entirely collapse if oil exporting countries stop accepting dollars. It is suspected that proposal of oil based currency by Saddam Hussein was major reason of Iraq war. Regardless of this verification, there is no other opinion about tremendous benefits USA enjoys from this system. Therefore, it can go to any length to preserve this monetary system and even fight against any attempt of change.
Fifth, mechanism of money is kept complex to avoid anyone challenging the powerful. There are several confusions about the current monetary system and complex functions of modern money. As money is used to serve the interests of powerful, they prefer to prevent world from understanding this mechanism. But massive damage from global financial crisis (2007-08) has led to interesting disclosures. One of those is significant difference in textbooks’ description of money creation and actual process.
Given these reasons, learning about the complex nature of modern money is most important issue before having rulings of Islamic law. This poses a question on preserving a system that benefits few on cost of many. Current monetary system massively exploits poor. Hickel (2013) reports that interest payments (financed by additional loans) from poor countries to rich are approximately five times higher than what they receive from rich in the name of foreign aid. Moreover, capital flight (including repatriation from multinationals and Swiss deposits of corrupts) from poor countries to rich is worth trillions of dollars. This exploitation of poor could never happen if we had not accepted it permissible to implement modern monetary system in Islamic countries.
Note: This note is based one first two sections of the article by Dr. Asad Zaman. For complete article and references mentioned see “On the Nature of Modern Money“